Inheriting Property After You File Bankruptcy In Colorado
When your attorney files your bankruptcy petition, a bankruptcy estate is created. Imagine a large basket (large enough to fit all your personal belongings and other assets). That’s the bankruptcy estate.
Once you file bankruptcy, those personal belongings and other assets no longer belong to you while your bankruptcy case is open. They belong to the bankruptcy estate. While a bankruptcy estate generally includes all of your assets, some property is not included, such as a 401(k) retirement account.
Assets that are exempt under the bankruptcy rules are also not included in the estate. What assets are exempt is determined by federal and state law. What state you lived in the two years before you filed bankruptcy will affect what exemptions you can use. We can take assets that are exempt out of the basket. You can read more about Colorado bankruptcy exemptions here.
Section 541(a)(5)(A) of the Bankruptcy Code states that “[a]ny interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date by bequest, devise, or inheritance.”
What that means is that any interest in property that comes to you from an inheritance within 180 days of filing bankruptcy will probably become part of your bankruptcy estate.
This applies to inheritance that is gifted directly to you. For example, if your grandmother passes you away and her will states that you are to get her five-carat diamond ring, you need to disclose that gift to the bankruptcy court, and you may have to turn it over if you can’t apply any exemptions to the ring. If available, you might be able to use a wildcard exemption or one that covers jewelry.
However, if your grandmother’s will states that your mother is to get her ring and then your mother decides to give it to you, that is just a gift. That is not an inheritance that needs to be disclosed to the bankruptcy court.
What happens when you inherit something 180 days after you file bankruptcy will also be determined by whether you filed Chapter 7 or Chapter 13 bankruptcy.
In Chapter 7, unless the inheritance is exempt, the trustee can take the property, auction it off, and use the proceeds to pay your creditors. Remember, though, that the trustee is not really interested in the object itself. He doesn’t want your grandma’s five-carat ring. He wants the $5,000 that it’s worth. You can keep the ring if you buy it back from the trustee. You just have to pay $5,000. Most trustees in Colorado will give you up to 12 months to pay that amount as long as you are making monthly payments.
In Chapter 13, you could keep the property, but you are likely going to have to increase the amount that your unsecured creditors are getting paid through the plan in amount equal to the value of the property you inherited. For example, if grandma’s ring is worth $5,000, you can keep the ring, but you’ll have to increase your plan to make sure your unsecured creditors get an additional $5,000.
This is not an entirely clear cut issue, however. Courts disagree as to when an inheritance becomes part of the estate at the time you actually receive the property or at the death of the person who has bequeathed the property. In Colorado, we need to disclose the inheritance when the person passes away.
If you think you’ll be getting an inheritance in the next year or so, you may want to delay filing to see if you can exempt the item or possibly liquidate it and spend the proceeds (you’ll also want to talk to a bankruptcy attorney about how to spend the proceeds, if it’s a large amount).
But unfortunately, oftentimes you won’t have any advance notice that you’re getting an inheritance. I have had clients whose parents passed away shortly after they filed with no advanced indication that was going to happen. Those clients had to turn their inheritances over to the bankruptcy trustee. The good news for one client is that the trustee used the inheritance to clear several years of back-owed child support.
This is just one issue that can make the bankruptcy process complex. If you have any questions about inheritance and bankruptcy, you should contact an experienced Denver, Colorado bankruptcy attorney. We can answer questions about this issue and any others you have about the process.
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